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Irish Innovation: Startup fever is confined to the high tech sector while Ireland's dumb enterprise policy expecting university research to become a jobs engine, is based more on faith than evidence.

We have often cited American and British research, which found that high growth firms -- the ones that add most jobs -- are not typically in the high tech sector and a report from McKinsey in 2010 said: "While many policy makers see innovative technologies as the answer to the challenge of job creation, our analysis indicates that governments are likely to be disappointed in such hopes.”

Researchers from the Universities of St Andrews, Glasgow and Stirling in a study published in January 2014 found a mismatch between the true nature of Britain’s high growth firms (HGFs) and the policies developed to support them. Their study concludes that the Westminster and Scottish governments have been over-subsidising technology firms many of which are incapable of growing, while missing the target on businesses with genuine high growth potential.

This week Ciara O'Brien of The Irish Times wrote: "Competition may be fierce, but as recent evidence suggests, with the right approach we can certainly hold our own."

The cited evidence was anecdotal but that's not uncommon and last December, the Department of Jobs, Enterprise and Innovation told Finfacts: "Minister Bruton and the Department of Jobs are unashamedly ambitious for the potential of scientific research in Ireland to support economic growth and job-creation in Ireland. In recent years we have improved our ratings for basic research to the point where we are now very competitive internationally - - the challenge now is to achieve greater returns in terms of commercial outcomes and jobs from this research."

Knowledge based capital (KBC) is a broad measure of investment in knowledge, which includes computerised information, innovative intellectual property (e.g, patents) and economic competencies (such as organisation capabilities). Ireland’s KBC has grown over time but, reflecting weak innovation in SMEs, its intensity remains in the lower half of the 18 OECD countries covered. In nearly all industries, firms’ involvement in patenting intellectual property is below the average of 15 other OECD countries (Squicciarini et al., 2013)."

The European Patents Office said this month that the technological strength of the leading European countries is reflected in the figures for European patent applications per million inhabitants: With 832 applications Switzerland tops the list, ahead of Sweden 402, Finland 360, Denmark and the Netherlands both 347. A comparison by economic region sees Japan with 177 applications clearly ahead of South Korea and the EU-28 average both 129, the US 107 and China 3. Ireland had a 13th rank in Europe with 115 applications.

We reported last year that the number of full-time jobs in services and manufacturing added by Irish firms in information and communications technology (ICT) in the period 2007-2012 was 1,600 [pdf].

According to the CSO, total jobs in the ICT sector fell by 600 in 2013.

Daniel Isenberg, a professor of entrepreneurship practice, at Babson College, a US business school, wrote in late 2012:

In recent years, we have been witnessing a significant global shift in attitudes towards entrepreneurship in countries around the globe. This is reflected in the dramatic proliferation of start-up programs: Start-up America, Start-up Chile, Start-up Russia, Start-up Britain, Start-up Weekend, and dozens of others. “Start-up” has replaced “Silicon” as the reigning entrepreneurship buzzword: There is hardly a country or city that is lacking a startup program.

Unfortunately, this is being guided almost exclusively by a narrow conception of entrepreneurship as consisting primarily in the starting-up of an enterprise. Equating entrepreneurship with start-up is not wrong; it is just very incomplete.]

He added that the biggest challenge is developing a business. For example, a comprehensive set of startup programs and policy reforms in Denmark in the early 2000s led to a dramatic increase in the numbers of ventures formed, but when analyzed five years later, the vast majority had plateaued at a few employees, and fewer than 1% met the fairly modest criteria set to be considered “growth” ventures.

Mariana Mazzucato, professor of science and technology at the University of Sussex, wrote last month on a blog of The Economist:

once you take into account the number of SME jobs lost after the first three years of their creation, there is very little net job creation by these firms. Only 1% of new enterprises have sales of more than £1m six years after they start. Research at the University of Sussex shows that median sales of a six-year-old firm is less than £23,000 (Storey, 2006). These firms also tend to be the least productive and least innovative (R&D spending—the best measure we have for inputs in the innovation process—in Tech City is not higher than in other parts of London or Britain). Indeed, the few high growth innovative firms (about 6% of the total SME group, Nesta, 2011)—those that really should be supported—do not directly benefit from the hype that surrounds SMEs and startups: once they get the funds these are too diluted to make a difference."

US research shows that a typical founder of a US high tech firm is not a recent university graduate but is about 40 years old and has long industry experience.

Research also shows that existing companies, not research universities or entrepreneurship programs, are the most fertile source of startup businesses in most metropolitan areas.

That's a key finding from a new study conducted by the US Kauffman Foundation, which also found that most areas with higher-than-average startup activity have been strong entrepreneurial centers for at least 20 years.

All of the top 10 areas for high-tech startup density in 2010 were in the top 20 in 1990, the study found. Silicon Valley ranked No. 1 in both years. Houston was the only city in the top 10 in 1990 that dropped out of the top 20 altogether in 2010. The only newcomers to the list of top 20 startup hubs in 2010 were Portland, Ore.; Wilmington, Del.; Phoenix; Kansas City; and New Orleans.

Houston wasn't the only Texas metro to experience a decline in high-tech startup density -- Dallas, Austin and Fort Worth also suffered through startup slumps between 1990 and 2010.

Other recent US research shows that the rate of entrepreneurship in the US high tech sector has declined in the past decade as existing firms acquire new startups.

Bart Clarysse, professor of entrepreneurship, at Imperial College London Business School, in a public lecture in February 2009, exploded the myths surrounding the economic importance of high-technology startups to the Europe.

"People think of the big names like Microsoft, Apple, HP, Intel and Xerox as once being new tech-start-ups," said Professor Clarysse at the lecture. "Yet most of these highly successful companies did not develop their own ideas. Typically they took existing technologies, developed by pioneering - - and sometimes financially unviable - - companies. They bought other businesses to help them succeed and appear credible."

Real technology startups tend to grow slowly, have a poor survival rate and contribute little to the wider economy in economic terms. Compared to the US, European start-up performance is poor. In Europe, after seven operational years these new firms comprise, on average, 18.5 employees with revenues of £250,000 and a mere 36% likelihood of surviving beyond 10 years.

In the UK there are over 2,900 of these companies that have been in business since 1991. Despite spending over £2.5bn, they are responsible for only 40,000 jobs. "They don't become the new Microsoft," said Professor Clarysse, "They just stay micro."

Professor Clarysse said that policy efforts should not be solely aimed at encouraging start-ups and nurturing technology transfer from universities. Ideally, concentrated funds between £2 - £4m would be made available for companies that are potential purchase targets, usually by a large customer via a trade sale. These trade sales can realise high values, even when a start up has little or no revenue. Big sale prices are achieved when the new firm's business model is set up for sale from the beginning. This is contrary to conventional business thinking and methods.

Science policy should support the development of large companies in the UK that are able to acquire smaller firms and then be sold on to an overseas interest. This would generate the most significant benefit and cash flow into a national economy. It is quite different to the current volume approach of raising numerous companies, many of which will never have a significant economic impact.

Further challenging the norms, Professor Clarysse suggested that many start-ups fail because they reach the market too soon. "There are no first mover advantages in high-tech," he said. "In fact it's a disadvantage as single firms cannot reduce the time required to move from product launch to a take off in sales, some 14.2 years on average. So it's better to join a market late."